Wednesday, January 24, 2007

Pension Pains Interest Gains

"What would you choose to be if not yourself? Anyone, any object, anything at all.." Thus reads one interesting question HRD often asks prospective employees. If I was at the receiving end of one such, I'd say I want to be the Fin Min's mind.

The move to get rid of pensions in stages is long overdue and kudos to the FM for saying it aloud. Subsidies are another area whose time for the chopping block has to come soon.

The rising pension bills at all levels of the government would be increasingly difficult to finance in future, given the other demands that are there on our resources, particularly for enhancing our expenditures on essential social sectors such as health and education. The pension expenditure of the Centre could reach Rs 35,020 crore by 2009-10. For the states, the projected figure is as high as Rs 65,081 crore.

The much needed Pension Fund Regulatory and Development Authority (PFRDA) Bill is awaiting clearance from Parliament.

Meanwhile, under the New Pension Scheme, employees contribute 10% of the sum total of their basic salary and dearness allowance. This is matched by an equal contribution by the government. Earlier, employees were not required to contribute anything and it was entirely on the government to provide for pensions. The objective is to offer a new pension system to all citizens employed in organized and unorganized sectors.

As expected, there is a hue and cry over slashing of pension and naturally so. Apart from one time MPs and MLAs who eat up precious resources, there are genuinely needy people who have all their hopes pinned on pensions. I have had a first hand experience of this at a bank which distributes pensions. Old folks will wait for hours on end at the beginning of each month of get that prized sum which sustains them till the next month.

To offset this cut, it would be just and timely to raise interest rates on FDs, bonds, government saving schemes. As the employee starts contributing to the pension plan, it will mean tax saving along the way. Also doing away with tax on interest gains will go a long way in encouraging people to plan their retirement through investments. There is news that the government plans to invest the corpus that is gathered from pension benefits in the share market. The left thinks it is fashionable to oppose any scheme that the government can come up with and so they will do just that.

The question now is will this move lead to increased saving and less spending? This question comes at the crucial time. With VAT and a slew of services coming under the service tax net with every Finance Bill in March, the government is hoping that people’s spendthrift ways will add more to their kitty.

No comments: